Chapter 3 - HMRC tax regime: benefits, reliefs and overseas schemes Flashcards
A serious ill-health lump sum can be paid from:
a.crystallised funds and uncrystallised funds regardless of the member’s age.
b.crystallised and uncrystallised funds, but only where the member has not reached the age of 75.
c.uncrystallised funds only regardless of the member’s age.
d.uncrystallised funds only, but only where the member has not reached the age of 75.
c.uncrystallised funds only regardless of the member’s age.
A serious ill-health lump sum can only be paid out of uncrystallised funds.
A serious ill-health lump sum is a relevant lump sum and a RBCE. Its payment does not reduce the member’s LSA, but it is tested against their LSDBA.
Member is under age 75
- The payment is made tax-free up to the member’s remaining LSDBA.
-Payments in excess of their remaining LSDBA are taxable as the member’s pension income via PAYE.
Member is over age 75
- The whole serious ill-health lump sum is taxable as the member’s pension income via PAYE
Chapter reference 3A1E
Tim applied for enhanced protection on 5 April 2006, although when he crystallised his benefits in 2024/25 his enhanced protection no longer applied. This is most likely to be because:
a.he crystallised his benefits after the age of 75.
b.the value of his benefits had fallen below £1,073,100.
c.he had accrued benefits in a pension scheme between 6 April 2006 and 5 April 2023.
d.following his divorce his pension savings were subject to a pension debit as a result of a pension sharing order.
c. he had accrued benefits in a pension scheme between 6 April 2006 and 5 April 2023.
When enhanced protection was introduced, the individual must have stopped being an active member of all approved pension schemes no later than 5 April 2006. This meant that no further relevant benefit accrual was allowed in a registered pension scheme after this date. If relevant benefit accrual did occur, enhanced protection would be lost
Chapter reference 3C2
Samir died in May 2024 at the age of 58. In July 2024 his widow received the death benefits from his employer’s defined benefit scheme as a lump sum death benefit of £480,000 plus a dependant’s scheme pension of £30,000 p.a. What is the amount that will be tested against Samir’s lump sum and death benefit allowance?
a.£600,000.
b.£480,000.
c.£750,000.
d.£1.08m.
b.£480,000.
payment is a RBCE so there is a test against the member’s remaining LSDBA where the:
* member was under age 75 when they died.
* it is paid out within the two year window.
If the payment is made within the two-year window, it is checked against the the member’s remaining LSDBA
Chapter reference 3B1B
Why might someone applying for fixed protection 2016 in November 2024 be told they are ineligible?
a.They applied after 5 April 2019.
b.Their pension benefits were valued at greater than £1.25m as at 5 April 2016.
c.Their pension benefits were valued at less than £1m as at 5 April 2016.
d.They already hold enhanced protection.
d.They already hold enhanced protection.
On 6 April 2016 the LTA was reduced again from £1.25 million down to £1 million, adversely
affecting individuals who had accrued pension rights in excess
of £1 million. These individuals can apply for fixed protection 2016.
Those with primary protection, enhanced protection or either form of fixed protection can not apply for fixed protection 2016.
fixed protection 2016 protects an
individual’s benefits up to a value of £1.25 million. Allowing a tax-free cash lump sum of up to 25% of £1.25 million, i.e. £312,500.
Chapter reference 3C3C
The money purchase annual allowance is only triggered in respect of a scheme pension when it is paid directly from a defined contribution arrangement where fewer than:
a.twelve other members, excluding dependants, are receiving a scheme pension.
b.eleven other members, including dependants, are receiving a scheme pension.
c.eleven other members, excluding dependants, are receiving a scheme pension.
d.twelve other members, including dependants, are receiving a scheme pension.
c.eleven other members, excluding dependants, are receiving a scheme pension.
Once in payment the scheme pension income is taxed as the member’s pension income
via PAYE.
Receiving a scheme pension does not usually trigger the MPAA. The MPAA is only triggered when it is paid directly from a defined contribution arrangement where fewer than eleven other members (including dependants) are receiving a scheme pension and the member
became eligible to receive it on or after 6 April 2015.
Chapter reference 3A2A
An employee died on 1 March 2024 but his previous employer’s pension scheme was not notified of his death until 1 December 2024. To avoid the lump sum death benefits payable from becoming taxable, the scheme must distribute these no later than:
a.30 November 2025.
b.30 November 2026.
c.28 February 2025.
d.28 February 2026.
b.30 November 2026.
Two-year window
This is the time within which the death benefits must be ‘designated’ to an income producing contract or paid out as a lump-sum death benefit. It starts from the date the
scheme administrator is notified of the death or, if earlier, the date they could reasonably be expected to know of the death.
Chapter reference 3B
Legislation has been introduced to increase the normal minimum pension age to 57 on 6 April 2028. Members of registered pension schemes who had an unqualified right to take their benefits from the scheme before the age of 57 will still be able to do so as long as they had this right on or before:
a.5 April 2021.
b.5 April 2022.
c.4 November 2021.
d.4 November 2022.
c.4 November 2021.
The Finance Act 2022 includes legislation to increase the normal minimum pension age from 55 to 57.
Schemes will be free to decide how and when to move to the new minimum pension age, as long as this is in place by 6 April 2028.
The legislation protects members of registered pension schemes who, on or before 4 November 2021, had an unqualified right to take their benefits from the scheme before the age of 57
Chapter reference 3A
Chi died in July 2024 at the age of 80 with a personal pension plan valued at £250,000. Her nominated beneficiary was her granddaughter Li Na. If Li Na decides to take the entire fund as a lump sum in September 2024, the payment will be:
a.subject to the special lump sum death benefits charge of 45% and there is no test against Chi’s remaining lump sum and death benefit allowance.
b.taxable as her pension income via PAYE and is also subject to a check against Chi’s remaining lump sum and death benefit allowance.
c.subject to the special lump sum death benefits charge of 45% and is also subject to a check against Chi’s remaining lump sum and death benefit allowance.
d.taxable as her pension income via PAYE and there is no test against Chi’s remaining lump sum and death benefit allowance.
d.taxable as her pension income via PAYE and there is no test against Chi’s remaining lump sum and death benefit allowance.
The payment of an uncrystallised funds lump-sum death benefit is a RBCE. Thus there will be a test against the member’s remaining LSDBA where:
* member was under age 75 when they died.
* lump-sum death benefit is paid within the two year window.
Death of the member
aged 75 or older
* when paid directly to the beneficiary – taxable as the recipient’s income via PAYE
* There is no test against the member’s remaining LSDBA.
Chapter reference 3B1A
The investments held in Sadiq’s self-invested personal pension [SIPP] include directly held shares in FTSE 100 companies. How much Capital Gains Tax [CGT] if any, will the SIPP pay on any gains made when these shares are sold?
a.20% on any gains that exceed the trust CGT exemption.
b.None.
c.10% on any gains that exceed the trust CGT exemption.
d.20% on all gains.
b.None.
The taxation of registered pension scheme investment funds is as follows.
- no liability to income tax arises in respect of income derived from investments or deposits.
- no CGT arises on gains and there is no allowance for losses.
- trading income is taxable.
Chapter reference 3D
On 6 April 2006, Dan’s executive pension plan [EPP] fund was valued at £250,000 and his tax-free cash entitlement on this date was also £250,000. Dan decides to take the benefits from his EPP in July 2024 when the fund is valued at £720,000. The value of the fund on 5 April 2023 was £670,000. How much can Dan take as a tax-free lump sum?
a.£180,000.
b.£720,000.
c.£250,000.
d.£670,000.
d.£670,000.
Prior to 6 April 2006, it was possible for a member’s total lump sum rights to equal their total pension rights. In other words, they were eligible to take all of their benefits as a tax-free cash lump sum. This is known as a standalone lump sum.
Prior to 6 April 2023, there was no limit to the amount of standalone lump sum that could be paid.
From 6 April 2023, the tax-free element of the standalone lump sum is limited to the value that could have been paid on 5 April 2023.
Chapter reference 3C8
Alicia crystallised her personal pension of £820,000 in 2019. She took the maximum PCLS of £205,000 and used the balance to purchase a lifetime annuity that included 100% annuity protection in respect of all capital used to purchase the lifetime annuity.
On her death in June 2024 at the age of 72, Alicia had received gross pension income of £92,250. How much will Alicia’s beneficiaries receive?
Alicia’s beneficiaries will receive:
- original purchase price = £820,000 – £205,000 = £615,000; less
- gross annuity income received to date of death = £92,250; equals
* £522,750
There will be no tax charge because Alicia died before reaching the age of 75. There was no test against Alicia’s LSDBA because the lifetime annuity was
bought before 6 April 2024 (so the fund used to buy the annuity must have been crystallised before 6 April 2024).
Emily elected for primary protection. She had aggregate benefits of £2.4 million at 6 April 2006, when the lifetime allowance was £1.5 million. She decides to draw benefits in 2024/25 when the value of her benefits has increased to £3 million.
- Calculate Emily’s primary protection factor.
- Calculate Emily’s LSDBA.
Primary protection will work for Emily as follows:
(value of the individual’s pension rights on 5 April 2006 − £1.5m)/
£1.5m = Primary protection rights
- Emily’s primary protection factor will be:
((£2.4m − £1.5m)/ £1.5m) × 100% = 60%
However, reductions to the lifetime allowance (from a high of £1.8 million in 2011/12) meant that the primary protection factor would be applied to a lower value, reducing the level of protection.
Therefore, to maintain the value of primary protection at the 2011/12 levels, for BCEs under the LTA regime in the tax years 2011/12 onwards, the primary protection factor was applied to a figure of £1,800,000, known as the underpinned lifetime allowance.
From 6 April 2024, the LSDBA applies instead of the LTA. A member with primary protection will have an increased LSDBA (before any deductions). This is calculated as:
£1.8 million × the member’s primary protection factor
- Emily’s LSDBA will be: £1.8m + (£1.8m x 60%) = £2.88m
On 5 April 2006 Jennifer had total benefits valued at £1.8 million and an entitlement to PCLS of £540,000. She registered for enhanced protection.
On 5 April 2023 Jennifer’s benefits are valued at £2.3 million. She decides to draw her benefits in May 2024, when the value has increased to £2.4 million.
Calculate the maximum tax-free lump sum that Jennifer can take in May 2024.
As £540,000 exceeds £375,000, Jennifer is entitled to a higher LSA based on the percentage of the uncrystallised fund that could have been paid on 5 April 2023.
Jennifer’s tax-free lump sum represents the following percentage of her benefits:
£540,000/£1,800,000 = 30%
When she takes her benefits, her maximum tax-free lump sum will be the lower of:
- 30% × £2.4 million (the value of her fund when she takes the benefits) = £720,000
or
- 30% × £2.3 million (the value of her fund on 5 April 2023) = £690,000.
Since the value of her benefits has increased since 5 April 2023, Jennifer’s maximum tax-free lump sum is £690,000
Multi-Choice
Carole would like to commute a personal pension plan with a value of £9,500, as a small pots payment. In respect of the LSA and LSDBA, which of the following
statements are correct?
a. The payment of a small pots payment is not a RBCE.
b. Carole must have some LSA or LSDBA remaining to take the small pots payment.
c. The payment will use up £9,500 of her LSDBA.
d. A small pots payment does not trigger the MPAA
(a) and (d) are correct.
(b) is incorrect because Carole does not need to have any LSA or LSDBA remaining to take a small pots payment.
(c) is incorrect because the small pots payment of £9,500 will not use up any of her LSDBA.
Who of the following would be subject to the MPAA rules in the 2024/25 tax year?
- Declan, aged 72, who took an UFPLS in June 2022 and has not crystallised any pension benefit since this date.
- Tanya, aged 56, who crystallises a personal pension plan valued at £100,000 in May 2024 from which she receives £25,000 PCLS and then designates £75,000 to flexi-access drawdown. She then takes an income of £10,000 from her flexi-access drawdown fund in March 2025.
- Lukas, aged 65, whose only pension is a capped drawdown plan which he started in 2014. In 2024/25 the basis amount is £35,000 and he draws an income of £52,000 from the fund.
Choose from the following options.
a. 1 and 2 only.
b. 1 and 3 only.
c. 2 and 3 only.
d. 1, 2 and 3.
The correct answer is a.
Declan is subject to the MPAA rules because taking an UFPLS is a trigger event for the MPAA rules. This means he is still subject to the MPAA in 2024/25 even though no
further benefits have been crystallised.
Tanya is also subject to the MPAA rules as she first accessed the income from her flexi-access drawdown fund in 2024/25.
Lukas is not subject to the MPAA rules as he only takes an income from his capped drawdown pension fund and the income he takes is within the maximum permitted (i.e. 150% of the basis amount of £35,000 = £52,500 and he took an income of £52,000).
Bill died in June 2024 at the age of 74 while drawing an income from his capped drawdown pension fund. His fund was valued at £450,000 at the date of his death. His beneficiaries choose to take a lump-sum death benefit and it is paid in September 2024. How much will they receive?
a. £450,000
b. £337,500
c. £247,500
d. £202,500
a. £450,000.
Bill died before reaching the age of 75 and the benefits were paid out within the two year window. Therefore, the payment is tax-free, so his beneficiaries will receive the full £450,000.
Frank, a professional footballer, had a protected pension age of 35 prior to 6 April 2006. He has now reached the age of 35 and decides to take his pension benefits six months after his 35th birthday. By how much, if anything, will Frank’s LSDBA be reduced?
a. His LSDBA will not be reduced.
b. 2.5%.
c. 47.5%.
d. 50%
The answer is c.
Frank has 19½ years to go to the normal minimum pension age of 55. The LSDBA is reduced by 2.5% for each complete year between age 35 years and six months and the normal minimum pension age of 55, i.e. 19 years. 19 × 2.5% =
47.5%
Each of the following pension scheme members has only one pension fund and has nominated a non-dependant to receive their pension benefits when they die. Assuming that in all cases the nominee chooses to take the benefits as a lump sum, in which of the following cases will the benefits be tested against the member’s LSDBA?
a. Kyler, who died age 56, with uncrystallised funds valued at £430,000.
b. Sue, who died aged 76, with uncrystallised funds valued at £760,000.
c. Sarita, who died aged 67, with funds valued at £1,570,000 held in a flexi-access drawdown plan that commenced in 2018.
d. Lucian, who died aged 77, with funds held in a capped drawdown plan valued at £2,340,000.
a. Kyler
who died age 56, with uncrystallised funds valued at £430,000.
When a member dies with uncrystallised funds, the fund that remains can be paid out as a lump sum to the member’s nominated beneficiary (or beneficiaries). This is known as an uncrystallised funds lump-sum death benefit.
There is no restriction on who the lump-sum death benefit can be paid to. The payment of an uncrystallised funds lump-sum death benefit is a RBCE.
Thus there will be a test against the member’s remaining LSDBA where the:
- member was under age 75 when they died; and
- lump-sum death benefit is paid within the two year window.
Moving money into flexi-access is a crystalising event and so Saritas funds would not be an uncrystallised funds lump-sum death benefit.
Herbert died, aged 60, in March 2024. In January 2023 he had purchased a lifetime annuity with £400,000 of previously uncrystallised funds.Herbert included annuity protection of 60% and when he died he had received gross payments totalling £23,500.
Herbert did not nominate anyone to receive his benefits and after an investigation the scheme administrator determined that 60% of the benefits should go to Herbert’s mother, Rebekah, aged 83, and the remaining 40% to his brother, Edgar, aged 48.
How much will Rebekah and Edgar each receive as an annuity protection lump-sum death benefit if the payments are made in March 2025?
a. Rebekah will receive £58,455 and Edgar will receive £38,970.
b. Rebekah will receive £71,445 and Edgar will receive £47,630.
c. Rebekah will receive £129,900 and Edgar will receive £86,600.
d. Rebekah will receive £225,900 and Edgar will receive £150,600
The answer is c.
Herbert opted for 60% protection (i.e. £400,000 × 60% = £240,000). When he died he had received payments of £23,500, meaning that the ‘unused’ funds totalled £240,000 – £23,500 = £216,500.
Herbert was under the age of 75 when he died and so the payment can be made to his beneficiaries tax-free.
This means that Rebekah will receive 60% of £216,500 = £129,900 and Edgar will receive 40% of £216,500 = £86,600
Meera, aged 73, died in May 2024 and left her uncrystallised defined contribution pension funds to her husband, Rajeev. Which of the following best describes the tax treatment if Rajeev uses these funds to purchase a dependant’s annuity in August 2024?
a. They will be tested against Meera’s LSDBA and the income will be taxed as Rajeev’s pension income.
b. They will be tested against Meera’s LSDBA but the income will be paid free of income tax to Rajeev.
c. They will not be tested against Meera’s LSDBA and the income will be taxed as Rajeev’s pension income.
d. They will not be tested against Meera’s LSDBA and Rajeev will receive the income free of income tax.
The correct answer is d.
The funds are being used to purchase a dependant’s annuity.
Only relevant lump sum death benefits are tested against the member’s LSDBA. Meera’s uncrystallised fund is being used to purchase a dependant’s annuity (i.e. an income) and so there is no test against the LSDBA.
Meera was aged under 75 when she died and the fund was used to buy the annuity within the two year window. Therefore, the income received from the dependant’s annuity is paid tax free.
Which of the following forms of income may be able to be paid as tax free income to a dependant?
i. Scheme pension
ii. Flexible annuity
iii. Capped drawdown
a. i and ii only.
b. i and iii only.
c. ii and iii only
d. i, ii and iii
The answer is c.
A scheme pension is always taxable (the rules did not change as a result of the Taxation of Pensions Act 2014).
A dependant’s flexible annuity set up on or after 6 April 2015 where the member died before their 75th birthday can be paid tax free.
A dependant’s capped drawdown plan may be paid tax free if the income stream did not commence until after 5 April 2015 and the previous holder died under the
age of 75.
Zara, aged 61, has a Qualifying recognised overseas pension schemes (QROPS). She now intends taking a payment from this pension. Which of the following methods of taking benefits from her QROPS will trigger the MPAA rules?
i. Scheme pension.
ii. Uncrystallised funds pension lump sum.
iii. Income payments from a flexi-access drawdown pension.
a. i and ii only.
b. i and iii only.
c. ii and iii only.
d. i, ii and iii
The answer is c. ii and iii only.
- ensure that flexibly accessing pension rights under a relevant non-UK schemes (RNUKS) will trigger the MPAA rules and that they are applied;
- apply the MPAA to pension savings made under a currently relieved non-UK scheme
- require scheme managers of overseas pension schemes, scheme administrators of registered pension schemes and individual members to provide information in prescribed
circumstances
What is the impact on the lump sum allowance where someone is entitled to take their pension benefits earlier than the normal minimum pension age due to their occupation?
LSA is reduced by 2.5% for each complete year below the normal minimum pension age (currently 55) for those people who, prior to A-Day, were entitled to take benefits before normal retirement age due to their occupation
What is the ‘month one basis’ used by providers of flexible payments where HMRC has not issued a tax coding notice?
- Payment made is taxed as if it is a monthly payment
- 1/12 of personal allowance and 1/12 of basic rate band 1/12 of higher rate band is applied to the payment
What are the two occasions when a trivial commutation lump sum death benefit might be paid?
• When a survivor commutes their survivor’s annuity or scheme pension
• When a member dies within the guarantee period of a lifetime annuity or scheme pension and the recipient of that guarantee wants to commute the payments that are remaining
What is the tax position of a dependant’s scheme pension where the member dies after age 75?
The income received by the dependant is taxed as their pension income via PAYE whether or not the member dies before or after age 75
When are lump sum death benefits considered to be outside the member’s estate on their death?
When an expression of wish form has been completed and payment made within the two-year window
What is the timescale for payment if a lump sum is to be treated as a PCLS?
It must be paid within 6 months before and 12 months after entitlement to
‘relevant pension’
What is the tax situation where someone takes a PCLS before age 75 and does not have sufficient lump sum allowance to support the tax-free 25%?
The excess is taxed under PAYE
What is the lump sum allowance situation for a member taking a UFPLS when they are aged over 75?
• The member must have sufficient LSA remaining to pay the tax-free portion
• If they do not then the excess is taxed under PAYE
What is the situation for someone over the age of 75 who would like to take a UFPLS which is more than four times their remaining lump sum allowance?
They can have a UFPLS, but the tax-free amount is restricted to their remaining LSA
What is the UFPLS position for those with a protected age of under 55?
• They can take a UFPLS but only if they are taking all their pension benefits
• They cannot take part as UFPLS and leave rest uncrystallised
What is a fundamental difference between primary and enhanced protection?
• With primary protection, contributions could continue/benefits accrued after A-Day
• With enhanced protection, no further benefits could build up after A-Day
How is the primary protection factor calculated?
(Total value of benefits at 5 April 2006 - £1.5m) / £1.5m
What does Individual Protection 2014 provide?
• A protected LTA equal to value of pension on 5 April 2014
• Subject to overall maximum of £1.5m
• No restrictions on future contributions or benefit accrual.
• Maximum PCLS is 25% of protected LTA
What must happen where someone has primary protection and when divorcing after 5 April 2006 suffers a pension debit?
• Their primary protection factor must be recalculated as at 5 April 2006
• Done by taking the value of the pension debit from the original value of benefits on 5 April 2006 and recalculating the primary protection factor using the lower value
How does automatic enrolment affect those with transitional protection?
• When become an active member through auto-enrolment
• Enhanced protection or fixed protection became invalid
• From 6 April 2023, this is no longer the case
How are the income and gains of a UK registered pension scheme taxed?
• No income tax liability on income from investments or deposits
• No tax on gains (no allowance for losses)
• Trading income is taxable
In the event of an unauthorised payment charge, what percentage is the charge and who is responsible for paying it?
• 40%
• Payable by member if alive, recipient if not
In what circumstances is a scheme sanction charge payable?
If the scheme makes at least one chargeable payment in the year
Who is liable for the scheme de-registration charge?
The scheme administrator
Under what circumstances will the overseas transfer charge of 25% NOT apply to transfers from a UK registered pension scheme to a QROPS.
No charge if QROPS is:
- Established in same country as member
- Established in EEA/Gibraltar and so is the member (not necessarily same country)
- Occupational scheme and individual is employee or sponsoring employer
- Overseas public service scheme and member is employed by employer participating in the scheme
- A pension scheme of an international organisation and the member is employed by them
Having opted for flexi-access drawdown your client will draw income which is paid
A. as earned income via PAYE.
B. free of any income tax.
C. gross but taxable via self-assessment.
D. as part capital (tax free) and part interest (taxable).
A. as earned income via PAYE.
All income from flexi-access drawdown in paid as earned income via PAYE.
Chapter reference 3A2B
Craig is a UK ex-pat resident in Portugal. He had no lifetime allowance protection.
During the 2024/25 tax year, he transfers his UK pension scheme valued at £1,000,000 to a Gibraltar based scheme which meets the definition of a QROPS. This would mean that he would be subject to
A. no tax charge.
B. a 25% tax charge.
C. a 40% unauthorised payment charge.
D. UK income tax at his marginal rate.
A. no tax charge.
As the scheme is a OROPS, the payment is an authorised one. Craig is resident in > Portugal, an EEA country, and the receiving scheme is based in Gibraltar. The amount is also within his overseas transfer allowance. Therefore, no overseas transfer charge applies. The payment would not be an unauthorised one and income tax does not apply on a transfer of benefits.
If it were to exceed £1,073,100 (the overseas transfer rate) then a tax charge of 25% may be chargeable
Chapter reference 3F1A
Don is considering taking the benefits from his defined contribution pension plan in the form of a scheme pension. The scheme administrator must
A. inform him that this is not possible with a defined contribution scheme.
B. request evidence that he has taken independent advice.
C. offer him the option of buying a lifetime annuity first.
D. advise him of the commutation rate for his pension commencement lump sum. (PCLS)
C. offer him the option of buying a lifetime annuity first.
A defined contribution scheme may provide a scheme pension, however, must offer the option of an annuity first. The PCLS would be the standard 25% of the fund value rather than being calculated by commutation as the plan is a defined contribution one.
Confirmation of advice is only required for a defined benefit transfer.
Chapter reference 3A2A
Where an unauthorised member payment is made after the death of the member, liability for payment of the unauthorised member payment charge would fall on the
A member’s estate.
B. recipient of the payment.
C. scheme administrator.
D. sponsoring employer.
B. recipient of the payment.
Where an unauthorised member payment is made after the death of the member then responsibility for the tax charge would fall on the recipient.
Chapter reference 3E
Exactly 1 year before A-Day Colin had a SIPP, which he converted into a drawdown arrangement, where he received the maximum available tax-free cash and although there was a maximum amount of income available of £42,500, he decided not to take any.
On A-Day the fund was valued at £527,000 although there had been no change to the GAD maximum income allowable.
In addition, Colin was in receipt of a pension from his service in the Armed Forces and the value of this on A-Day was £26,400 per annum.
Colin also had a third pension arrangement: a Stakeholder Pension with an A-Day value of £267,500.
Calculate, showing all your workings the primary protection factor that applies to Colin.
Answer
Colin is entitled to a primary protection factor of 32.67%
Detailed explanation
Colin’s benefits have the following values at A-day:
Drawdown benefit (£42,500 x 25) £1,062,500
Armed Forces pension (£26,400 x 25) £660,000
Stakeholder fund £267,500
Total £1,990,000
(£1,990,000 - £1,500,000) ÷ £1,500,000 = £490,000 = 0.3266666 or 32.67% after rounding.
NB. Benefits already in payment are valued using a factor of 25:1 and any benefits being taken via drawdown, the maximum allowable income withdrawal is used, even if this is different from the actual income being taken.
CII R04 Study Text Chapter 3, Section C1
Jack was already drawing a scheme pension of £54,000 per year at A-day. In addition to this he had a further defined benefit deferred pension valued at £20,000 per year at A-Day.
What would Jack’s primary protection factor be?
Answer
Jack is entitled to a primary protection factor on 16.67%
Detailed explanation
Crystalised scheme pensions are valued using a factor of 25:1.A standard 25:1 valuation factor was used for pre-A-Day income benefits.
Uncrystallised DB pensions are valued using a factor of 20:1. Pension benefits are valued using a factor of 20:1
Value of pension in payment: £54,000 x 25 =£1,350,000.00
Value of deferred pension: £20,000 x 20 =£400,000.00
£1,350,000 + £ 400,000 = £1,750,000
Primary protection factor = (£1,750,000 - £1,500,000) ÷ £1,500,000 = 0.1666667 or 16.67%.
CII R04 Study Text Chapter 3, Section C1
Doreen’s PCLS entitlement at A-day was £425,000 and she registered for primary protection, she wishes to take her benefits in this tax year. She has taken no previous pension benefits.
Calculate her maximum PCLS entitlement.
Answer
Doreen’s PCLS entitlement is £510,000.
Detailed explanation
If primary protection was selected, then the maximum PCLS that could be protected was the monetary amount of PCLS at A-day. This was indexed in line with increases in the statutory lifetime allowance (using an underpinned lifetime allowance figure of £1.8 million) between A-day and the date the benefits were taken. As the lifetime allowance has now been abolished, the underpinned figure of £1.8m will remain the reference point.
Therefore:
£425,000 x (£1,800,000 ÷ £1,500,000) = £510,000
CII R04 Study Text Chapter 3, Section C1A
An individual with a right to tax-free case of more than £375,000 as at 5 April 2006 was able
to register for primary protection to protect their higher entitlement.
Protected tax-free cash
The starting point for the calculation of the protected tax-free cash was the monetary amount of tax-free cash on 5 April 2006. This amount was indexed in line with increases in the LTA using the underpinned LTA of £1.8 million. This meant that the monetary amount was multiplied by 1.2 (i.e. multiplied by £1.8m/£1.5m).
Any tax-free cash previously taken also had to be taken into account:
- The tax-free case taken from 6 April 2006 to 5 April 2012 – the monetary amount was indexed in line with increases in the standard LTA between A-Day and the date benefits were taken.
– This meant that the tax-free cash was multiplied by £1.8m/PLTA, where PLTA was the standard LTA in force at the time the tax-free cash was taken (i.e. the previous lifetime allowance). - Tax-free cash taken on or after 6 April 2012 – the monetary amount was deducted. From 6 April 2024, the maximum tax-free lump sum that can be taken is the LSA. For a member with primary protection with protected tax-free cash, their LTA (before any
deductions) is determined by their protected tax-free cash amount as calculated above.
On 5th April 2006, Desmond had total benefits valued at £2.3m with a PCLS entitlement of £690,000. He opted for enhanced protection with tax-free cash protection.
His fund as of 5 April 2023 was valued at £2.75m, calculate his lump sum allowance.
Answer
Desmond is entitled to a PCLS of £825,000.
Detailed explanation
Under enhanced protection, Desmond’s entitlement to PCLS is protected as a percentage of the benefits value at A-day.
Desmond’s PCLS represents 30% of his total benefits:
£690,000 ÷ £2,300,000 = 0.3
Therefore, Desmond’s entitlement is based on his fund value as of 5 April 2023 and is the same percentage that it was at A-day:
£2,750,000 x 30% = £825,000
CII RO4 Study Text Chapter 2, Section B5A
Tariq is 56 and has an uncrystallised personal pension plan with a value of E9,000. He decides to take this as a small pots payment. Tariq has total income of £24,000 in this tax year.
Calculate the net amount Tariq will receive.
Answer
£7,650
Detailed explanation
25% of the payment is tax free and 75% of the payment is taxed as Taria’s pension income via PAYE. Tariq is a basic rate taxpayer.
The tax treatment of the payment is:
£9,000 x 25% = £2,250 tax-free
£9,000 x 75% x 20% income tax = £1,350
Tariq will therefore receive £9,000 - £1,350 = £7,650
If the payment is made in respect of crystallised benefits, the whole payment is taxed as pension income under PAYE
CII R04 Study Text Chapter 3 Section A1C
Flo is aged 65 and receives a small pension from the defined benefit scheme of a previous employer. The capital value of the scheme is £20,000 and she would like to take this as a lump sum. Flo works part-time and has earnings of £13,000. She pays income tax at the basic rate.
Calculate the net amount Flo will receive.
Answer
£16,000
Detailed explanation
Flo can take this as a trivial commutation lump sum payment as the value is below
£30,000. Because it is being made in respect of a scheme pension the whole payment is taxed as pension income via PAYE.
£20,000 x 20% = £4,000
Flo will receive £20,000 - £4,000 = £16,000
If the benefits had not been crystallised 25% would have been paid tax free and 75% taxed as pension income under PAYE.
CII R04 Study Text Chapter 3 Section AlD
Chris had a flexi-access drawdown account. He died when he was 73 and nominated his wife Claire who was 79 as his dependant. If she continues to take withdrawals using drawdown, what rate of income tax will she pay?
Answer
Nothing
Detailed explanation
As Chris was under 75 when he died there is no tax. The age of Claire is irrelevant.
CII R04 Study Text Chapter 3 Section B2E
Kim is 60 and has no taxable income in the current tax year. She has a personal pension valued at £300,000 and she decides to take £40,000 of this fund as a UFPLS.
Calculate the net payment that Kim will receive.
Answer
£36,514
Detailed explanation
25% is paid tax free - £10,000
The remaining £30,000 is taxable via PAYE
She has a personal allowance of £12,570 so only £17.430 of the UFPLS is subject to income tax.
£17,430 x 20% = £3,486
£40,000 - £3,486 = £36,514
CII R04 Study Text Chapter 3, Section A1B
In November 2024 Julie takes a UFPLS of £30,000 from her personal pension. She has a personal allowance of £12,570.
Calculate the amount of tax that will be deducted using the month one basis and the net payment that Julie will receive.
Answer
Amount of tax = £8,503.87
Net amount to Julie = £21,496.13
Detailed explanation
£30,000 × 25% = £7,500 paid tax free
The balance of £22,500 is subject to PAYE on a month one basis.
Personal allowance of £12,570 x 1/12 = £1,047.50 with no tax deducted
Basic rate band of £37,700 × 1/12 = £3,141.67 of the payment is taxed at 20% = £628.33
Higher rate band of £125,140 - £37,700 x 1/12 = £7,286.67 of the payment taxed at 40% = £2,914.67
Balance of the payment £22,500 - (£1,047.50 + £3,141.67 + £7,286.67) = £11,024.16 is taxed at 45% = £4,960.87
This means that £8,503.87, is deducted from the UFPLS leaving a net payment of £21,496.13
This is the one month basis and seems a bit ridiculous really
CII R04 Study Text Chapter 3, Section A3
Alan, a basic-rate taxpayer, is exercising his right to take all his benefits from his defined benefit pension scheme in the form of a lump sum under the Trivial Commutation rules. If his CETV is £12,000, what amount will Alan receive?
A. £9,600
B. £10,200
C. £7,200
D. £12,000
B. £10,200
A trivial commutation lump sum allows a member of a defined benefit or in payment defined contribution in-house scheme to take their benefits as a lump sum rather than an income if their total scheme benefits are less than £30,000. A cash equivalent transfer value (CETV) is the value placed on pension benefits. Therefore, as Alan’s CETV is £12,000, he is able to take the trivial commutation lump sum, which is taxed as follows: 25% tax free = £3,000, the remaining 75% is taxed as pension income under PAYE, in Alan’s case he is a basic rate taxpayer so 20% of £9,000 = £1,800. Therefore, his total net proceeds are £3,000 + £7,200 (i.e., £9,000 - £1,800) = £10,200. - Chapter 3, Section A1D, Learning Outcome 2
A scheme would be likely to qualify as a qualifying recognised overseas pension scheme (QROPS) if it is in a country which
A. agrees to implement the same pension regulations that apply in the UK.
B. has a double taxation agreement in place with the UK.
C. agrees not to impose any pension flexibility.
D. allows members to access their pensions no earlier than age 50.
B. has a double taxation agreement in place with the UK.
One of the criteria which may result in an overseas pension being considered a QROPS is being set up in a country (other than New Zealand) with which the UK has a double taxation agreement. There are restrictions around tax relief offered by the scheme and the minimum pension age must be 55 but not all UK pension legislation must be applied. - Chapter 3, Section F1, Learning Outcome 2
Alan, aged 40, is a member of an occupational pension scheme, the normal retirement age for which is 65. The rules of his scheme when he joined in 2018 stated that he has the right to take the benefits from the age of 55 with the consent of the trustee. From what age may Alan be able to take his benefits?
A. 55
B. 56
C. 57
D. 65
C. 57
From 6 April 2028, the national minimum pension age will increase from 55 to 57. Scheme members may retain a lower retirement age where the scheme rules contained a right to retire early at, or prior to, 4 November 2021. However, in order to do so, such a right must have been unqualified, i.e., must not have required the consent of any other party. - Chapter 3, Section A, Learning Outcome 2
7
Derek is curious about whether he should apply for a transitional tax-free amount certificate (TTFAC). He is most likely to benefit from this if he
A. has not crystallised any benefits prior to 6 April 2024.
B. took previous benefits under a higher lifetime allowance.
C. took his full PCLS entitlement at each previous benefit crystallisation event (BCE).
D. took benefits under a scheme with a set 3/80ths lump sum entitlement.
D. took benefits under a scheme with a set 3/80ths lump sum entitlement.
The certificate would most likely be useful to someone with a 3/80ths PCLS entitlement as this would have meant the PCLS was less than 25% of the value of the lifetime allowance used. For all of the other options, the TTFAC would be likely to either make no difference or result in a lower remaining lump sum allowance. - Chapter 3, Section C10, Learning Outcome
Examples of members who are most likely to have additional tax-free amounts if they apply for a TTFAC include those who took benefits:
* from a defined benefits scheme with poor commutation rates, or where the PCLS was based on a 1/80th plus 3n/80th entitlement;
* from a defined benefit scheme and did not take any PCLS (or chose to take less than the maximum tax-free cash);
* containing GMP that restricted the PCLS payable to below 25% of the fund;
* between 2016/17 and 2019/20 (inclusive) when the LTA was below £1,073,100;
* that contained a disqualifying pension credit (as there is no PCLS entitlement from a disqualifying pension credit); and
* those who incurred BCEs that did not include tax-free payments (BCE3, BCE5A, B, C or D, BCE8 or BCE9); and
* those who took low or no PCLS because their scheme had generous guaranteed
annuity rate.
If HM Revenue & Customs (HMRC) withdraws registration of a registered pension scheme, then a de-registration income tax charge will be levied. This amounts to
A. 40% of the prohibited assets which caused the scheme to be de-registered.
B. 15% of the fund value held immediately before de-registration.
C. 25% of the fund value held immediately before de-registration.
D. 40% of the total value of funds held immediately before de-registration.
D. 40% of the total value of funds held immediately before de-registration.
If HMRC withdraws registration of a registered pension scheme, a de-registration income tax charge of 40% of the total value of the funds (those held immediately before registration) is levied on scheme. This is payable by the scheme administrator. - Chapter 3, Section E, Learning Outcome 2
How is a trivial commutation lump sum taxed
the value of the pot or the cash equivalent transfer value of the DB has 25% tax free and 75% taxed as income at PAYE I.E a member who pays basic rate tax with a DB scheme with a CETV of £12,000 would have £3,000 tax free and £9,000 at the rate of 20%
If someone has enhanced protection rights how much is their starting LSA
£375,000
If someone has primary protection rights how much is their starting LSA
£375,000
If someone has fixed protection 2012 rights how much is their starting LSA
£450,000
If someone has fixed protection 2014 rights how much is their starting LSA
£375,000
If someone has fixed protection 2016 rights how much is their starting LSA
£312,000
If someone has individual protection 2014 or 2016 rights how much is their starting LSA
25% of the protected LTA
what is the effect of taking LSA early before the normal minimum pension age
LSA is reduced by 2.5% per year
on death how are pre and post age 75 benefits tested against the LSDBA
pre-75 the benefits are tested against LSDBA and anything above is taxed at marginal rate
Post-75 they are not tested against LSDBA but they are taxed as income using PAYE
What RBCE’s are tested against the LSA
- Pension commencement lump sum (PCLS)
- Stand alone lump sum (SALS)
- Uncrystalised funds pension lump sum (UFPLS)
- Serious ill health lump sum (SIHLS)
what are the relevant lump-sum death benefits tested against LSDBA
- Defined benefits lump sum death benefit
- uncrystallised funds lump sum death benefit
- Annuity protection lump sum death benefit
- Pension protection lump sum death benefit
drawdown/flexiaccess drawdown lump sum death benefit - dependants/nominees/ successors flexiaccess drawdown lump sum death benefit
what are the relevant lump-sum death benefits that are NOT tested against LSDBA
- Charity lump sum death benefit
- Trivial commutation lump sum death benefit
how do you calculate the lump sum allowance someone has available using the ‘standard transitional calculation’
its the LSA minus the % of the previously used life time allowance whilst under other LTA’s times the current LTA times by 25% to reach the available LSA
£268,275 - (25% x previously used % of life time allowance x £1,073,100)
so where someone had previously used 50% of the allowance and assumed no protection, it would be
£268,275 - (25% x 50% x £1,073,100) = £134,137.50
What impact does a transfer to a Qualifying Recognised Overseas Pension Scheme [QROPS] have on a member’s lump sum allowance [LSA] and lump sum and death benefit allowance [LSDBA]?
a.Both the LSA and the LSDBA will be reduced.
b.The LSA will not be reduced, but the LSDBA will be reduced.
c.The LSA will be reduced, but the LSDBA will not be reduced.
d.Neither the LSA nor the LSDBA will be reduced.
d.Neither the LSA nor the LSDBA will be reduced.
A transfer to a QROPS does not reduce either the LSA or the LSDBA.
A member’s OTA is the same as their LSDBA. Hence the OTA is £1,073,100 unless the member has transitional protection. If benefits were crystallised before 6 April 2024, the
member’s available OTA is reduced by an amount equal to 100% of their LTA usage.
Chapter reference 3F1A
Desmond dies at the age of 68 in receipt of a scheme pension. If the scheme continues to pay an income after his death, his wife Debbie will receive a dependants scheme taxed how?
C. dependant’s scheme pension taxed as her pension income under PAYE.
If Desmond’s pension scheme continues to pay an income to his wife Debbie after his death, this will be paid to her as a dependant’s scheme pension and will be taxed as her pension income under PAYE. (Note: a dependant’s scheme pension is taxed as the dependant’s pension income whether or not the scheme member dies before or after age 75). - Chapter 3, Section B2B, Learning Outcome 2
